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AML and KYC Compliance in Crypto

by InnReg

Rapid growth in crypto innovation and adoption is leading regulators to seek to close regulatory loopholes in the industry. Striking a balance between protecting the public good and managing innovation risks will help create a foundation for greater reliability and further growth. Regulation that limits money laundering and financial crime is an essential piece of the puzzle.

Subject-matter experts with decades of experience wrote this analysis, not freelance copywriters, third party agencies, or AI-based tools. We are global regulatory compliance experts.

How AML and KYC Compliance Are Helping Cryptocurrencies Go Mainstream

Know Your Customer (KYC) and Anti-Lomey Laundering (AML) compliance processes are essential to the mainstreaming of crypto. These compliance processes protect institutions from supporting corruption, fraud, money laundering, and terrorist financing. Major banks, investment managers, and other financial services firms expect such requirements to be clearly delineated and managed before exposing themselves to the underlying risks.

As a result, regulators are expanding their reach to manage cryptocurrency trading with enforce robust AML and KYC compliance procedures and checks. This effort will boost identity verification and anti-fraud efforts across geographies. Therefore it is imperative for fintech companies to understand the evolving AML and KYC regulatory landscape.


AML Regulations for Crypto

Cryptocurrency remains appealing to criminals due to its pseudonymous nature and the ease with which it allows users to send funds anywhere. In 2021 alone, funds laundered through cryptocurrency exchanges increased by 30%.

The Financial Action Task Force (FATF) has been publishing recommendations for AML compliance regulations globally since 2014. Policymakers in FATF’s member jurisdictions have taken action. Today, FinCEN, the European Commission, and dozens of other regulatory bodies have codified most of FATF’s cryptocurrency AML recommendations into law.

Effective AML compliance regulations have two important consequences: first, they make laundering schemes riskier and less profitable; second, they create new avenues by which investigators can catch and prosecute bad actors. Over the last several years, the gradual growth in the implementation of these regulations has gone a long way to help deter money laundering crimes.

KYC Regulations for Crypto

KYC in cryptocurrency covers identity verification procedures required by law for virtual asset service providers (VASPs) and other fintech companies that offer cryptocurrencies. KYC compliance processes are important because they enable criminal investigators to connect pseudonymous cryptocurrency addresses to real-world entities if those addresses are connected to criminal activities.

However, for cryptocurrency, KYC requirements are less standardized than in traditional finance. Most exchanges require that new customers share their legal name, government-issued ID, and up-to-date address information, but this varies on the basis of where the exchange operates and what services it provides.

In October 2021, FATF clarified that NFT marketplaces, DeFi protocols, and stablecoin providers, depending on what activities they engage in, should also be obligated to implement KYC procedures.

The Future of AML and KYC Cryptocurrency Compliance

If mass institutional adoption of cryptocurrency is to take off, the crypto industry at large must abide by AML and KYC regulations more rigorously. Widespread adoption of crypto will hinge on crypto exchanges guaranteeing safety, security, and the rule of law to maintain market integrity.

For example, some innovative solutions emerging within the crypto industry specifically address the issues of both identity verification and the use of pseudonyms. Solutions such as anonymous identity verification modules may offer a compromise that supports AML and KYC compliance requirements while still allowing some degree of anonymity.

One common type of solution only requires a user to verify their identity once; they can then use this initial verification to prove their identity to new vendors, bypassing the to repeatedly provide their personal information repeatedly. Others will likely emerge.

Staying Ahead of Evolving Crypto Regulation

As cryptocurrency has expanded and reshaped the global financial network, its stability in the future and continued success can only be ensured through the adoption of effective KYC and AML measures and frameworks. Therefore, it is essential that any company offering cryptocurrency services to businesses or consumers be aware of the ever-changing and evolving crypto compliance landscape.

As an outsourced compliance provider, InnReg can help cryptocurrency businesses stay compliant with rapidly evolving regulatory landscape and AML / KYC regulations.

The Author

InnReg is a team of over 30 Regulatory Compliance and Innovation Consulting experts helping fintechs succeed in highly regulated markets since 2013. InnReg specializes on mitigating regulatory risk while helping clients launch and grow innovative fintech products and services.

Topics: Crypto Regulation

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